Car finance – Everything you need to know!

By Jill Gourlay March 25, 2024
Family at Dealer | CarMoney.co.uk

How does car finance work in the UK?

Personal Contract Purchase (PCP)

Car Finance | CarMoney.co.uk

Some of the advantages of PCP car finance are:

Lower monthly payments

Monthly payments on a vehicle financed through a PCP agreement are often cheaper than those on a Hire Purchase agreement.

Positive equity

Owning a car with positive equity means the car’s value exceeds the amount left to pay. The car is worth more than the outstanding balance. This common occurrence can work in your favour, as you will get to keep the difference.

Change your car

As PCP offers lower monthly payments compared to HP, it is more likely that you will not end up owning it as the balloon payment is far higher. You can change your car within 3-4 years of your agreement by getting a settlement figure from the finance company.   

Option to purchase

Once your car loan term comes to an end, you have the option to purchase the vehicle if you choose to keep it. The price you pay will be determined by the car’s guaranteed future value. This allows you to continue enjoying the car you have been making payments on and make it your permanent possession.

Some of the disadvantages of PCP car finance are:

Ownership costs

The final balloon payment is usually higher than with HP, which you would need to pay to own the car outright.

Condition of the vehicle

You must meet the standards outlined in your contract and will be charged for anything beyond fair wear and tear. So, keeping it in good condition is crucial to avoid these charges. 

Mileage limits

If you keep the car the entire length of your contract term and exceed the agreed mileage limit, you could be charged extra per mile you do go over.

Possible higher interest

You will be charged a higher interest rate if you have a low credit score.  

Hire Purchase (HP)  

Car Finance | CarMoney.co.uk

Some of the advantages of HP car finance are:

Fixed payment agreement

HP offers a fixed interest rate and a consistent monthly payment, unlike other finance options that may fluctuate based on interest rates.

No mileage restrictions

You will not be subject to any mileage restrictions as you will become the owner at the end of the agreement, unlike with a PCP agreement. This can be a significant advantage if you use the vehicle for long commutes, road trips, or other high-mileage activities.

Ownership

You will own the car at the end of the agreement. 

Some of the disadvantages of HP car finance are:

Higher overall cost

The cost for HP car finance is more expensive than PCP as with PCP, you are not paying towards the total cost of the car. Whereas with HP car finance, you are. 

Ownership

You are only considered the full owner once the agreement is completed, and all payments have been made.

Credit score

The interest rates you are offered heavily depend on your credit score. Individuals with low credit scores can anticipate being subject to significantly higher interest rates than those with good credit scores. This holds true across various financial products, with HP car finance being especially impacted.

Personal Car Loan

Car Finance | CarMoney.co.uk

Some of the advantages of a Personal Car Loan:

Fixed interest rates

Fixed interest rates on personal loans offer predictable and stable monthly payments, making budgeting easier.

Ownership from the start

A personal loan allows you to buy the car immediately, unlike leasing agreements, where you rent it for a fixed period. By owning the car, you have complete control over customisation and modifications and can sell it whenever you want.

No mileage restrictions

Unlike leasing agreements, personal loans do not have mileage restrictions, so you can drive the car as much as you want without worrying about excess mileage fees.

Some of the disadvantages of a Personal Car Loan are:

Early repayment penalties

Certain personal loans may come with prepayment penalties, which can restrict your financial flexibility and nullify any potential savings that could be gained from repaying the loan early.

Credit score

Your overall interest rate for a personal loan is dependent on your credit score. Obtaining a good / excellent credit score could result in being offered a low APR rate loan.

Car Leasing

Car Finance | CarMoney.co.uk

Car leasing offers the convenience of driving a brand new car for a fixed term, typically 2-4 years, much like renting an apartment. You have the freedom to choose the car you want, from the make and model to the fancy extras. There’s usually an initial payment upfront, like a deposit on your rent, that can range from a single month’s payment to a whole year’s worth. 

Throughout the lease term, you’ll make fixed monthly payments that cover the depreciation, which is the fancy way of saying how much value the car loses over time. These payments tend to be lower than what you’d pay with a PCP (Personal Contract Purchase) or a car loan, offering you financial security. 

However, unlike PCP, leasing doesn’t give you the option to own the car at the end. It’s more like a long-term rental agreement. There are often mileage restrictions, meaning you can only drive a set number of miles per year. If you go over that limit, you’ll be charged extra fees. 

When the lease is up, you return the car to the leasing company, just like handing back your keys at the end of your tenancy. They’ll expect the car’s condition to be good, with the usual wear and tear from everyday driving being perfectly acceptable. 

Couple buying car at dealer | CarMoney.co.uk

Here’s where PCP differs. PCP is like a rent-to-own option for cars. You spread the cost over a set period with a deposit upfront and fixed monthly payments. But in the end, you have a choice. You can make a final balloon payment, a more significant sum, to become the car’s owner. Alternatively, you can return the car, similar to leasing, although there might be mileage restrictions to consider. PCP can also allow you to use the equity in the car as a deposit towards a new PCP deal on another brand-new car. 

What checks are done for Car Finance UK?

Upon submitting your car finance application, the company will evaluate your eligibility and financial standing to confirm your ability to purchase a vehicle and fulfil payment responsibilities. 

Checks that will typically be done:

  • Proof of identity
  • Address
  • Proof of income
  • Employment
  • Driver’s licence
  • Credit score
  • Background check

Details:

Cech List | CarMoney.co.uk
$

Proof of identity

Car financing companies must check your identity to prevent fraud. They confirm your name, previous names, birthdate, marital status, and address. 

$

Address

Car finance lenders typically require that individuals have resided in the UK for at least three years before being eligible for car finance options. Lenders place significant importance on traceability, as it is an essential aspect of car finance to locate borrowers who may have stopped repaying their debt.  

$

Proof of income

Lenders often require evidence of your income when you request a loan in order to verify that you have a dependable source of income to meet your monthly loan obligations. This process of verification typically entails submitting recent pay slips, tax returns, or bank statements as proof of your income and financial stability.

$

Employment

Lenders often require information about your employment or work history to evaluate your creditworthiness and determine your loan repayment ability. This information is critical because it allows them to confirm your employment status and assess your income. To verify your information, lenders may check with your employer to confirm your job title, employment status, and income. 

$

Driver's licence

Your driving license not only acts as evidence of your identity but also confirms to the lender that you have the legal right to drive. Typically, lenders, car dealerships, and finance brokers will request a copy of your licence when you submit your application.

$

Background check

A comprehensive assessment of your financial responsibility and identification of any warning signs may be conducted through a background check. Through this process, lenders can gauge the risk level of extending a loan to you.

Understanding your credit score for car finance

As there are some differences from lender to lender and country to country, it is important to understand as a whole what a credit score is and how it works when applying for finance.

Firstly, what is a credit score?  It is an assessment of an individual’s creditworthiness, employed by creditors to evaluate the potential risk associated with providing a loan to that Individual.

In the UK it ranked from 0-999. Different finance lenders rank the scoring differently, but majority assess the same details from employment, income, address and credit score.

Nikki Credit Score | CarMoney.co.uk

Things to consider about car finance

Car Finance with Bad Credit Score | CarMoney.co.uk

Is it possible to get approved for car finance if you have a bad credit score?

It is often feasible to obtain car finance even with a bad credit score. Nevertheless, individuals in this situation are typically subjected to significantly higher interest rates and limited choices than those with good or excellent credit scores.

Car Finance with default | CarMoney.co.uk

Can someone with defaults on their credit score get approved for car finance?

Getting car finance with defaults on your credit score is still possible, but it may be more challenging and have certain limitations compared to those with a clear credit history. The borrower’s defaults on past credit agreements may lead to lenders questioning their capacity to repay new loans.

Approved benefits | CarMoney.co.uk

Can you get car finance on benefits?

Obtaining car finance while receiving benefits is a possibility; however, eligibility will vary depending on the lender’s criteria and your situation. Specific lenders may consider applicants who receive benefits. Still, they will evaluate your capacity to make monthly payments by considering your overall income and expenses, which includes any benefits you are currently receiving. Using a finance broker could provide you with options that include no guarantor car finance.

Length of the process | CarMoney.co.uk

How long does it take to get approved for Car Finance?

Lenders may have different response times. Typically, finance partners will reply to your application within 1-2 business days. However, some lenders can provide instant decision car finance. If your case is more complex, the lender may take longer to review and decide.

Missed Payment | CarMoney.co.uk

What can happen if you miss a payment for car finance?

If you fail to make payments on your car loan, there can be many consequences. The nature and severity of these repercussions may differ from case to case, depending on your loan agreement’s specific terms and conditions.

Below are some typical outcomes of missing a car loan payment:

If you miss a payment on your car loan, it can have multiple effects. The outcomes depend on the agreement you signed when you took out the loan.

Some of the common effects include late fees, which are charged when you miss payment deadlines. Late fees can vary, so it is important to check your agreement. Late fees can keep piling up if you miss more payments.

Ensuring timely payments is vital when it comes to determining your credit score.  Missing or delaying payments can lead to a decrease in your score. A better credit score may enhance your chances of obtaining favourable financing terms.

If you fail to make payments on your car finance on time, the lender may take steps to collect the outstanding amount. This may include contacting you to discuss payment arrangements. In more severe situations, the lender may seize the vehicle to recover the debt.

Contacting your lender is essential if you foresee any payment challenges. Some lenders may help you make a short-term payment plan or find other ways to prevent missing loan payments.

They can work with you to develop a solution that fits your needs. This could include adjusting your payment schedule or offering alternative payment options. By working together, you can find a way to manage your loan payments effectively.

End of therm | CarMoney.co.uk

What happens at the end of a finance term?

When your car finance term ends, you will have several options based on your agreement with your financing company.

If you have taken out a PCP deal then the first option is to purchase the car by making the final balloon payment, which represents the Guaranteed Future Value. This means you will own the car outright once the payment is made. For a HP deal or personal loan as you are committing to owning the car after all payments are made then nothing is required to be done as once you have cleared the cost then you will become the full owner.

The second option for a PCP deal is to return the car to the financing company, and they will calculate the Guaranteed Future Value to finalise the agreement. This means you will not own the car but will have completed your financing obligation.

Lastly, you can choose to trade in the car for a new one. This option allows you to upgrade your vehicle and make payments under a new financing agreement.

It is essential to carefully examine your financing agreement or lease contract to understand the exact terms and options available to you upon the conclusion of the term. If you need clarification, speaking with your lender or leasing company is always a good idea. They can help you understand your options and make informed decisions about your vehicle.

Negative equity | CarMoney.co.uk

What should you do if you owe more money on your car loan than your car is worth?

Owing more money on your car loan than your car is worth is also known as negative equity.

There are several reasons why negative equity can happen, one being depreciation. Cars lose value as time passes, with specific models depreciating faster than others.

In the initial stages of the loan, borrowers may realise that the amount they owe on their car loan exceeds the actual worth of the vehicle, especially if they have a high interest rate or have opted for a longer loan duration.

Individuals with negative equity on a car loan must thoroughly assess their alternatives, considering their financial circumstances and current loan conditions. Consulting with financial experts or lenders can also help identify the most appropriate resolution.

Our top most asked questions on car finance | FAQs

Q. Can you pay off your car finance early?

A. Yes. However, if you do so early in your agreement, there could be a repayment fee.

If you end a finance agreement before its scheduled termination through voluntary termination rules, it will be recorded on your credit report.

Future finance companies that review your record will not have access to the reasons for the termination, which is unlikely to affect your credit score significantly. However, if you use this approach multiple times, lenders may view you as a potentially higher risk, leading to increased borrowing costs in the future.

FAQs | CarMoney.co.uk
FAQs | CarMoney.co.uk

Q. Can I hand back my car to the finance company?

A. Returning your car to the finance company is possible, but it is subject to the terms of your financing agreement and the specific policies of the finance company.

Suppose you need help making payments or no longer wish to keep the car. In that case, you may have the option to negotiate with the finance company for a voluntary surrender of the vehicle.

This is commonly referred to as voluntary repossession. However, it is essential to note that voluntarily surrendering your car does not automatically absolve you of your financial responsibilities. The finance company may still require you to settle any remaining balance on the loan after they sell the car at an auction and any fees related to the repossession.

Q. Can you modify your car while it is financed?

A. As a finance agreement does not make you the legal owner of the car, making significant modifications to it is prohibited.

This is because it can decrease the value of the vehicle and can breach the contract. The finance company needs help calculating the car’s value with the modifications, making it difficult to assess fairly.

FAQs | CarMoney.co.uk
FAQs | CarMoney.co.uk

Q. Does having car finance impact your ability to obtain a mortgage?

A. Car finance can impact your ability to obtain a mortgage because it affects your overall debt-to-income ratio and creditworthiness, which are crucial factors that lenders consider when evaluating mortgage applications.

Although having car finance does not necessarily make you ineligible for a mortgage, it is crucial to consider how it affects your financial situation and ability to afford homeownership. Managing your debt responsibly, making timely payments on all obligations, and maintaining good credit can increase your chances of qualifying for a mortgage with favourable terms.

Q. Can I get car finance even if I am self-employed?

A. Even if you are self-employed, it is possible to get car finance.

You may need to provide more information than those who are employed. This information may include proof of income, credit history, and income stability. You may also need to put down a larger deposit than those employed.

FAQs | CarMoney.co.uk

CarMoney LIMITED is authorised and regulated by the Financial Conduct Authority (FCA) for consumer credit activity and our registration number is 674094. Representative 17.9% APR. Over 18’s only. CarMoney IS A BROKER NOT A LENDER.

REGISTERED ADDRESS: Pioneer House, 2 Renshaw PL, Motherwell, ML1 4UF, Scotland.Company Number: SC467274.

All finance is subject to status and income. Written Quotation on request. CarMoney Limited can introduce you to a limited number of finance providers based on your credit rating and we will receive a commission for such introductions.